Credit Managers' Index Decline in February Surprises

The National Association of Credit Management's Credit Managers' Index dropped significantly this month, an unexpected decrease given where projections were a few months ago. The monthly economic indicator's combined score declined to 53.2 in February, down from 55.1 in January.

"That is a nasty drop and at no point in the last year has it been that low," said Chris Kuehl, NACM economist. "In December, it stood at 54.9 and that was seen as bad enough. The reduction in the overall score was reflected in reductions across the board—favorable and unfavorable factors and in both the manufacturing and service sectors."

The survey measures activity in manufacturing and service sectors among business-to-business credit professionals. The index of favorable factors fell to 57.2 and sales dropped to 59.5, which is troubling because it is the first time either has fallen below 60 since March 2014, according to CMI data. The new credit applications category also set a dubious record, dropping from 58.3 to 54.4.

"The one piece of positive news was dollar collections, as it moved from 60.1 to 62.8; but the only way to describe amount of credit extended is: collapse," Kuehl explained. "In January, it was at 62.2 and now it sits at 52.1. That is a nearly catastrophic decline and one that is worse than anything seen in close to three years. It would not be an understatement to assert that there is suddenly a credit crunch manifesting. That hasn’t been an issue since 2009."

Other categories that declined in February within the index of unfavorable factors, which itself slid overall, include rejections of credit applications, disputes, dollar amount beyond terms and filing for bankruptcies. Showing a small increase included accounts placed for collection and dollar amount of customer deductions.

The full report will be available here on Friday, Feb. 27. CMI archives may also be viewed here on NACM's website.

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A concrete contractor on the 1 World Trade Center project that was fraught with delays and cost overruns reportedly is seeking Chapter 11 protection because of slow payment from a government entity. Collavino Construction Company alleges the Port Authority of New York and New Jersey, somewhat known in construction circles for slow payment history and allegedly questionable or even predatory practices, has yet to make payment despite work on the project being completed more than a year ago. Collavino claims the Port Authority reportedly owes upward of $87 million and said it is without the necessary liquidity to pay suppliers because of the collections delay it faces.

Earlier this month, Altegrity Inc. filed for Chapter 11 as a result of problems tied to data breaches/hacking. The filing includes a number of subsidiaries and related companies, including about a dozen firms under the Kroll moniker that plan to continue operations throughout the restructuring. Altegrity, which provides services including data security and screening of potential contractors, was hit hard in a 2013 hacking incident that led to the exposure of thousands of U.S. federal workers' personal information. Notably, Altegrity once investigated Edward Snowden as part of a federal contractor employment background check.

U.S. Bankruptcy Judge Christopher Klein confirmed on Feb. 25, the long-delayed exit of Stockton, CA, from Chapter 9 bankruptcy. Though smaller and less complicated than the Detroit municipal bankruptcy case, Stockton’s reorganization dragged on for much longer in the courts in large part because of its dogged fight with the California Public Employees' Retirement System (CalPERS) over the issue of pensioners’ rights. Though creditors seem to be taking a greater hit than pensioners in Stockton, Klein strongly hinted that proceedings showed that pensions should be fair game for review during future Chapter 9 cases and characterized CalPERS as a misguided bully throughout the process. This, along with losses by pension representatives in the Detroit case, perhaps sets the stage for more municipalities to challenge those representing retired public workers' rights, as such entitlements are typically the greatest problem for U.S. municipalities struggling with escalating debt loads. In addition, one of Stockton's largest creditors publicly promised to appeal the ruling on the city’s bankruptcy exit plan at the appellate court level.

Like the solar industry a few years ago, it seems the market for offshoot businesses tied to alternative digital currencies is purging some of its excess players. Bitcoin mining outfit Aquifer LLC, like CoinTerra in January, filed for Chapter 11 because the recent plunge in the value of the often-volatile currency battered its margins to the point of insolvency. Bitcoin, growing in interest despite a downturn in its value, is still trying to recover from the fraud-caused collapse of the massive, unregulated Mt. Gox exchange last year that rattled the confidence of some forward-looking investors and, even more so, a mainstream media only mildly educated on the topic of alternative digital currencies.

- Brian Shappell, CBA, CICP, NACM managing editor

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Economic Report Focuses on Middle Class

The U.S. recovery has accelerated in terms of output and employment, according to the 69th annual Economic Report of the President, recently released by the Council of Economic Advisers. This year’s seven-chapter report outlines recovery since the Great Recession and focuses on President Barack Obama's economic policies, which his administration says will improve productivity, labor force participation and income inequality.

The report covers the past year's economic highlights and echoes points he made during his State of the Union address with an emphasis on economic policies, which he refers to as "middle-class economics."

"By most measures, the pace of output growth has risen relative to the beginning of the recovery," it states. Over the past two years, the economy has grown at an annual rate of 2.8% compared with 2.1% over the first 3.5 years of the recovery and that job growth has risen 30% faster in 2014 than 2013, according to data.

Gross domestic product grew 0.7 percentage point faster per year over 2013 and 2014 than over the first few years of the recovery. The report also takes a look at household sector’s liabilities-to-income and debt-service ratios. "By the third quarter of 2014, required payments on mortgage and consumer debt had fallen to 9.9% of disposable income, nearly the lowest level on record." The report also credits the 2014 unemployment decline to strong job growth rather than a shrinking labor force and considers the opportunities and challenges that face the U.S. labor market.

The other side of the hall, however, finds fault with the annual report. The House Republicans website, www.gop.gov, gave it an "F," calling Obama's economic approach "deleterious to American families."

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Russia Junked Again

Moody's Investors Service downgraded the government of Russia's sovereign debt rating on Feb. 20 to junk status. The drop in rating comes one month after Standard & Poor's made a similar call, marking the first time Russia dipped below investment grade in more than a decade, according to reports.

Moody's cut the rating from Baa3 to Ba1 with a negative outlook and identified several factors that led to the drop:

Continuing crisis in Ukraine and the recent fall in oil prices and of the ruble exchange rate;

Fiscal pressures and continued erosion of Russia's foreign exchange reserves in light of ongoing capital outflows and restricted access to international capital markets; and

Although still low, increasing risk that international response to the military conflict in Ukraine might trigger a decision by Russian authorities that would directly or indirectly undermine timely payments on external debt service.

"In Moody's view, the existing and potential future international sanctions, the erosion of the country’s foreign exchange buffers and persistently lower oil prices plus high and rising inflation will take a negative toll on incomes as well as business and consumer confidence," the credit agency said. "As a result, Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016."

The negative outlook reflects the potential for more severe political or economic shocks to emerge, related to the Ukraine conflict or a renewed decline in oil prices. Moody's also has lowered Russia’s country ceilings for foreign currency debt to Ba1NP from Baa3/P3, its country ceilings for local currency debt and deposits to Baa3 from Baa2 and its country ceiling for foreign currency bank deposits to Ba2/NP from Ba1/NP. "A country ceiling generally indicates the highest rating level that any issuer domiciled in that country can attain for instruments of that type and currency denomination," Moody’s noted.

Although it doesn’t anticipate upgrading Russia's rating in the near term, the credit agency said it "would consider stabilizing the outlook if the macroeconomic and financial market conditions were to stabilize, if the risks of financial market volatility were to subside and/or if there was a serious prospect of the Ukraine crisis being resolved in such a way that the risk of ongoing or escalating military hostilities and further sanctions were to dissipate."

Moody's also said it would consider downgrading the country’s government bond rating if the macroeconomic and financial market conditions deteriorated substantially below the agency's base case or if the Russian government watered down or abandoned its fiscal and structural reform plans. Other factors that could negatively influence Russia's rating include additional sanctions due to an escalation in the military conflict, as these would further undermine its economic strength, as well as actions that could create more uncertainty about the government's capacity or willingness to continue to service its debt, Moody's said.

- Diana Mota, NACM associate editor

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Housing Market Showing Small Growth, But Future Predictions Differ

Home prices across the United States showed a small increase at the end of December with nine major cities reporting higher numbers than the previous month, according to data released this week from the S&P (Standard and Poor's)/Case-Schiller Home Price Indices. Still, housing recovery could be best described as "faltering," according to David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices.

"While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession," he said. "The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence."

The S&P/Case-Schiller 10-City and 20-City Composite Home Price Indices both show slight year-over-year increases to end 2014, while the U.S. National Home Price Index fell by 0.1%. Prices increased in San Francisco and Miami to 9.3% and 8.4%, respectively, over the previous year, while Las Vegas showed the strongest decline in annual returns. Showing the largest increase over one month were Miami at 0.7%, Denver at 0.5% and San Francisco at 0.4%. On the negative end of the spectrum, the largest decreases came from Chicago at -0.9% and Cleveland at -0.5%.

In contrast to Blitzer's concern for overall housing prospects, Toll Brothers, Inc.—the largest luxury homebuilder in the U.S.—reported on Feb. 24 a higher-than-anticipated first quarterly profit. Through the end of January, Toll Brothers brought in a net income of $81.3 million compared to $45.6 million at this time last year. Revenue reached $853.5 million, and home building deliveries tracked at 1,091 units. Both marked a significant increase from the previous year. Because of these higher numbers, Toll Brothers increased its financial and home-delivery expectations estimates for the upcoming year.

"More jobs and better jobs should boost household formations and provide a basis for stronger housing demand," said Executive Chairman Robert Toll. "With the latest release from the National Association of Realtors citing home price appreciation, our buyers, who often are selling a home to move up, will have more money to invest in their new home and more potential customers to buy their existing home. Another positive data point comes from the Conference Board, which said consumer confidence in January reached its highest level since August 2007. We believe these positive macroeconomic trends, coupled with recent federal initiatives to increase mortgage availability, should support housing's recovery."

- Jennifer Lehman, NACM marketing and communications associate

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Analysis Shows Gender Differences in Credit

A recent analysis of small-businesses by Experian shows payment behavior and credit management varies by gender. On average, commercial credit scores were slightly higher for men than for women, 35 and 34, respectively. Experian based the scores on a scale of 1 to 100, with 100 being least risky, and they predict the likelihood of severe delinquency—more than 91 days past due—within the next 12 months.

Men also fared slightly better based on the average number of days they paid their bills past the due date, 8.1 days versus 8.4 days. And while 48.3% of women run their business out of their homes and 14.5% of them realized sales more than $500,000, the percentages for men were 44.8% and 24%, respectively.

Additionally, "more than 22% of male-owned businesses have at least one open commercial trade account, while the same can be said for only 18.5% of women-owned businesses," Experian said.

As for the types of industries each gender operates more frequently, several ranked in the top 10 for both men and women, including business services, retail stores, building maintenance, restaurants, real estate and management consulting. Top 10 industries specific to men were comprised of general contracting, motion-picture and video-tape distribution, general automotive repair and plumbing. Those credited to women included beauty shops, personal services, child daycare as well as gift, novelty and souvenir stores.

"We hope this information brings increased awareness to the connection between credit scores and access to capital," said Darla Beggs, national board chair for the National Association of Women Business Owners.

"While there are a lot of similarities in the industries male and female business owners explore, it is clear that there are still some distinct differences between the two," said Peter Bolin, Experian's director of consulting and analytics. "By understanding a business owner’s credit behavior and demographic and firmographic information, lenders will be able to gain deeper insight in order to take appropriate action when making a lending decision or marketing to prospective clients."

The analysis is based on a statistically relevant sampling of data from Experian's consumer and commercial credit database from November 2014, and the sample was based on a known business population where gender was identifiable, Experian said. Average scores don't represent national averages or a random national sample, it noted.